Wednesday, February 01, 2006

Laughing at Laffer

Man it's been a long time. shrug - busy life. Anyway...

Recently I've been listening to people use the laffer curve to justify tax cuts. They're guilty of misunderstanding what the curve is saying, and it's such a pervasive misunderstanding that I'd like to make a general response.

Yes, the Laffer curve says that if you cut taxes you increase revenue. If you stop there, however, you're wrong. See, it is equally true to say that if you raise taxes you increase revenue.

Go look at the curve. As it goes right, it goes up, rounds out at the top, and goes down. The "going right" axis is the tax rate. The going up axis is revenues. What's not labelled is where the magic number is. What anyone trying to use the Laffer curve to justify cutting taxes to increase revenues must defend is the position that we are presently to the right of the peak.

Because if we're to the left, we decrease revenue.

Note, please, that this is government revenue. That gives us the ability to pay for things, which includes the ability to pay off our national debt.

So the next time someone uses the Laffer curve to justify cutting taxes, ask them to demonstrate we're to the right of the peak. And when they go "huh," laugh at Laffer. Then take a moment to teach them.


Blogger SoWhat said...

Right on Kirk. "Where's the data?" When tax rates to pay for WWII were over 70% for the wealthiest individuals, a few people could be on the "right side of the curve" (where lowering tax rates would increase revenues). In that era, the Laffer Curve was applicable. This is clearly no longer the case in this modern ear where the top tax bracket is 35%.

I put a sketch of the curve on my blog..

Keep up the work!!

3/21/2006 11:05 PM  

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